Dr. Gyan Pathak
Gratuity and leave encashment rules will not be applicable for majority of the workers in India under the new labour codes, which is likely to be rolled out for full implementation from April 1, 2026. According to the latest February 2026 assessment of the ICRA, an Affiliate of Moody’s in India, up to 85 per cent of the workers of the country will not be eligible for gratuity and leave encashment.
After the new labour codes were notified on November 21, 2025, these have been legally effective and many companies started implementing them. New labour codes triggered one-time gratuity and leave encashment charges in Quarter 3 of Financial Year ending on March 31, 2026. However, gratuity applicability remains structurally limited, with eligibility confined to only 15-20% of India’s 560 million workforce, given the prevalence of self-employment and small establishments, ICRA’s assessment said.
Despite one-time charges in Q3FY2026, the impact of new labour codes on aggregate earnings has been modest for the broader corporate sector. The more noticeable effects have been concentrated in manpower-intensive sectors like IT/software, manpower services, and select consumer facing sectors.
At an aggregate level, the financial impact of the new labour codes on corporate India has been modest, with the earnings impact for listed companies estimated at less than 10 basis points (bps) on an annualised basis, despite one-time charges recognised in Q3 FY2026.
Manpower-intensive sectors with higher wage intensity have understandably borne a larger impact, led by IT/software, manpower services and select consumer-facing sectors, where employee costs account for a meaningful share of revenues.
The impact of labour codes for large IT/software companies is narrowly clustered at around 3.5-4.0% of annualised OPBITDA, whereas manpower services companies show a wider dispersion with the exceptional charge ranging between 0-43% due to divergent accounting approaches.
Gratuity charges will increase mildly in future as well, beyond the one-time Q3 FY2026 impact. However, the overall financial impact will be largely manageable, with most companies indicating pass-through mechanisms, cost recalibration, and limited recurring margin implications going forward.
ICRA has noted that India has large workforce but gratuity payouts apply only to a small minority. India has a 560 million strong workforce, out of which 250 million are employed in agriculture and allied activities; 160 million are in services sector which include IT, financial services, communication, education, health, trade, hospitality, transport etc; 70 million in construction, and 65 million in manufacturing.
Moreover, a large share of the non-agriculture workforce is either self-employed or works in establishments that employ less than 10 workers. The gratuity provisions have been refreshed under the Social Security Code, 2020, but the same apply only to establishments employing 10 or more employees, similar to the Payment of Gratuity Act, 1972.
In effect, the gratuity payouts are estimated to be currently applicable only to around 15-20% of India’s total workforce. Gig/ platform workers are covered under the social security provisions but are excluded from gratuity benefits due to the absence of a formal employer-employee relationship.
Under the Social Security Code, 2020, enforced from November 21, 2025, gratuity rules have changed in two primary ways: (a) Fixed-term employees have become eligible for gratuity payout after one year of service (for permanent employees, the 5-year minimum service threshold remains unchanged); (b) Wages (Basic + DA +retaining allowance) must form at least 50% of total remuneration, increasing the gratuity liability for employers who previously maintained lower wage proportion.
New gratuity rules cast a (small) shadow on the financial results of Corporate India, the study has noted. The new wage definition has increased the gratuity payment obligations of corporate India, although the impact varies across entities and sectors. Mandatory leave-encashment and clearer overtime rules also have a financial impact, especially for support roles working extended hours.
Higher gratuity requirements and expanded coverage for gig and non-traditional workers will increase long-term social security liabilities. Companies engaging freelancers or project-based talent may face new funding and reporting obligations.
Additional establishment registrations, stricter norms for migrant employees, and enhanced health-and-safety requirements will increase compliance complexity. Allowing women to work nightshifts also demands stronger security and transport arrangements.
Mandatory contributions to the Re-skilling Fund, broader applicability of standing orders, and the need for formal grievance committees may raise compliance costs and require more structured workforce-management processes.
Gratuity eligibility is not inherently governed by sectoral factors; rather, it is determined by: (a) whether employment is wage/ salaried in nature, and (b) whether the 10-employee threshold is met. Only around 15-20% of India’s workforce draws wages or salaries, with the remainder being largely self-employed (55-60%) or engaged in unpaid family work (15-20%).
The implementation is estimated to have trimmed the operating profit margins of corporate India(listed companies) by less than 10 bps (annualised),corresponding to Rs. 8,000 crore in ICRA’s sample of 1,650 companies, with companies likely to recalibrate cost structures or pass on increased costs to customers over time.
Employee costs remain high in the manpower services sector because of it is heavily labour-driven, with people forming a core part of the delivery model. The business relies on large-scale staffing and deployment, keeping employee costs as the dominant expense. Nevertheless, profitability will have not be much impacted. Team Lease Services has said, “The newly notified labour codes will not impact profitability. Contract structures allow any incremental statutory cost like gratuity, leave encashment, or other compliance obligations tube fully passed through to clients.”
NIS Management has also said, “New labour codes should not have a major impact on profitability, as statutory compliance rests with principal employers, while NIS operates as a contractor and will renegotiate customer contracts accordingly.” (IPA Service)
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